The Ecstasy For Gold And The Brexit Vote

Summary

For the past few weeks, the uncertainty around this vote bolstered the demand for GLD.

How will this vote impact GLD? What's next for GLD following the British referendum?

By Friday, we will know what the British people have decided regarding whether to remain in or exit the European Union. The possible adverse consequences of a Brexit have been covered by many news outlets. And the increased uncertainty has helped bolster the demand for shares of SPDR Gold Trust (NYSEARCA:GLD). The day after the British referendum, however, will the ecstasy for gold diminish if the vote goes toward the Bremain campaign? And what if there is a Brexit vote? Will it keep driving GLD's price higher?

The Pound and GLD

The volatility in the financial markets has been rising in recent weeks, mostly due to the Brexit vote. For now, the polls still show a close call with 44% wanting to remain, and 45% wanting to leave, and 11% who are undecided. Conventional wisdom dictates that undecided voters tend to stick with the status quo -- i.e., vote to remain. And on betting sites, the odds placed on a Brexit vote are at only 27% vs. 73% for a Bremain vote. In the past couple of days, market sentiment shifted slightly toward risk-on mode as more people feel the vote will go toward remaining in the EU. The linear correlation between the daily percent changes of the U.S. dollar index and GLD remained robust at -0.325. The weaker dollar has helped boost the demand for GLD.

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Source: Google Finance and FRED

In the background, over the past few weeks the devaluation of the British pound has coincided with the recovery of GLD prices, as indicated in the next chart.

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Source: Google Finance and FRED

This irregular trend -- both the U.S. dollar and the British pound losing ground -- might remain in place if we see a Brexit vote. Moreover, in case of a Brexit vote, given the current sentiment and the cautious optimism that Britain will remain in the EU, the market reaction is likely to be much more abrupt and favorable -- at least in the immediate term -- for GLD. Conversely, in case of a Bremain vote, the market reaction is likely to be less severe. While the price of GLD is likely to fall, it won't plummet.

After all, the main driving forces pushing up GLD are still at play, including the weakening of the U.S. dollar, the decline of interest rates and the Fed's policy. The recent FOMC meeting concluded without a rate hike and had a bit more of a dovish tone, which reduced the market expectations for even a single rate hike this year. While a Bremain vote will reduce the uncertainty in the financial markets, the Fed's policy could still drive up GLD's price in the subsequent months to offset the adverse impact this vote will have on GLD.

It should be noted that there has been a staggering rise in the demand for GLD, as indicated in the following chart.

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Source: GLD's website

It shows the amount of gold holdings in the GLD (as reported by GLD) in tons. As of the end of last week, gold holdings have passed the 900 tons of gold mark -- the last time it reached this level was back in September 2013. If the Britain referendum goes toward leaving the EU, we are likely to see a sharp drop in GLD's gold holdings.

Bottom Line

It will be a very busy day for GLD this coming Friday regardless of how the British referendum goes. In case of a Brexit vote, GLD prices are likely to spike -- at least in the short term - and benefit from the risk-off market sentiment. In the case of a Bremain vote, GLD's price is likely to fall, but could bounce back in the following weeks. The Fed's policy will still be one of the major factors moving GLD. And if the Fed keeps leaning toward maintaining low rates, this could keep GLD prices up. (For more, please see "Gold And Inflation - Is There A Relation?")

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.